A proposal for Polkadot to establish its own native algorithmic stablecoin, solely backed by DOT tokens, is receiving considerable early backing.
On Sunday, Bryan Chen, co-founder and chief technology officer of the Acala chain within the Polkadot ecosystem, presented a plan to create a native stablecoin for the Polkadot network. This stablecoin would be algorithmic, exclusively supported by Polkadot (DOT) tokens, and would carry the ticker pUSD.
The stablecoin is intended to utilize the decentralized stablecoin and collateralized debt position protocol Honzon on the Acala network. The goal is to diminish or eliminate reliance on Tether’s USDt (USDT) and Circle’s USDC (USDC) stablecoins.
Currently, more than three-quarters of the votes have been cast in favor of the proposal. However, there are still over 24 days remaining before the vote concludes, and over $5.6 million worth of DOT has been used for voting — equating to more than 1.4 million DOT at approximately $3.90 per token.
Related: Stablecoins: Depegging, fraudsters and decentralization
The stablecoin’s design
The envisaged pUSD algorithmic stablecoin would be an overcollateralized debt token backed by DOT. An optional savings module could be included, allowing holders to lock their stablecoins and earn interest from stability fees.
According to Chen, the aim is to enhance Polkadot’s ecosystem with a native stablecoin. “Polkadot Hub should have a native DOT-backed stablecoin because it is essential for users and otherwise we risk losing benefits, liquidity, and/or security,” the proposal states.
A decentralized algorithmic stablecoin is aimed at mirroring the value of a fiat currency without relying on centralized collateral held by third parties. Collateral comprises digital assets held on-chain and overseen by smart contracts, with the peg maintained through economic incentives embedded in the contracts.
Related: Sonic Labs replace algorithmic USD stablecoin with UAE dirham alternative
Algorithmic stablecoins remain controversial
Following the infamous collapse of Terra’s native stablecoin, TerraUSD (UST), algorithmic stablecoins have seen a decline in popularity, bringing down the entire ecosystem. Nevertheless, this asset type continues to draw significant interest, partly due to its enhanced decentralization.
This decentralization suggests a more permissionless (and less controllable) design. Ki Young Ju, CEO of crypto analytics firm CryptoQuant, noted in early May that algorithmic stablecoins might lead to the emergence of “dark stablecoins” that evade regulatory oversight and sanction enforcement.
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